CHAPTER 4 - Agriculture and Economic Growth in Asia

Agriculture
● Agriculture & Economic Growth
● Agricultural Transformation in Asia
● Microeconomics of Agriculture
● Macroeconomics of Agriculture
● Policy Issues in Modernizing Agriculture

The Role of Agriculture in Economic Growth

● Agriculture provides food to rural and urban areas
● Agriculture is a rich source of factor inputs. E.g. workforce/labor
● Agriculture is a source of capital input. Capital input is generated from invested savings and savings
income. Capital accumulation may be slow.
● The ability of agriculture to supply foreign exchange enables the economy to import capital equipment
and intermediate goods.
● Agriculture facilitates the inflow of technology and industrial expertise
● The agricultural sector is a rich market for inputs or product for the urban sector

Lewis Fei Ranis Model

● Captures the transition of economy from mainly agriculture to mainly industrial sector
● According to this model there are two main sector in an economy: modern and traditional sector
● Traditional sector
➢ Located in the country side
● Modern sector
➢ It presents the cities
● The relative importance of agriculture declines proportionally with the increasing GDP

Sectoral Distribution of GDP Employment of Labor Force

● The illustration depicts the evolution of GDP employment by sector in taiwan. Evidently the share of
agriculture gone down from 54% to 9% favoring the industry and services with services having the
biggest gainer among the sectors

● If you look at the share of income from agriculture, industry, and services, the trend is likewise
transformational from agriculture to industry and service in east asian, southeast asian, south asian
countries except for hong kong and singapore whose always been driven by industry and services.
● The contribution of agriculture to the economy of Hong Kong and Singapore is negligible simply
because these countries have less parable lands to start with as compared with the other countries in
asia. So these economies rely heavily on imports for food consumption.
● Bangladesh was weak in manufacturing in 1970 - 2007 but today the country’s growth is industrially
driven particularly in garments
 ● The southeast asian countries are composed of the philippines, malaysia, brunei, singapore, thailand,
vietnam, indonesia, cambodia, and laos

● The east asian countries are composed of china, mongolia, north and south korea, japan, hongkong,
and taiwan

● The south asian countries are afghanistan, pakistan, india, bangladesh, sri lanka, india, nepal, bhutan,
and maldives

Productivity in Agriculture
● Productivity in agriculture is generally higher than that of the industry at the beginning of the process
(Timmer, 1991). The industry is weak in the beginning of the transformation therefore it needs
protection from the foreign competitions. There are 2 important points Timmer (1991) wants to
emphasize in this study, first, in an economy where agricultural output is not rising, the agricultural
sectors still contain a potential surplus of labor time, food output, and saving capacity which require
only appropriate public policies for their release. This is termed as a static view of resource transfer.
The second point is that in an economy where agricultural output is up through a combination of
 investment and technical progress, part of the increment in farm output and income is available for
transfer in non agricultural sectors. This is termed as a dynamic view of resource transfer. To sum it up,
Timmer (1991) claims that the game in agriculture jumpstarts the process of industrialization
● Surplus from the increase in profitability of agriculture fueled the beginning of industrialization.
●

Growth of Agriculture and GDP in the 70’s

Growth Countries

Agriculture: Above 3% China, Indonesia, Korea, Malaysia, Philippines,

GDP: 5% Thailand, Columbia, Dominican Republic, Tunisia,
Turkey, Yemen, Cameroon

Agriculture: Bet. 1%-3% Bangladesh, India, Pakistan, Sri Lanka, Central

GDP: Bet. 3%-5% African Republic, El Salvador, Haiti, Honduras,
Upper Volta.
● This data supports the claim that the higher the growth in agriculture, the higher the growth in gross
domestic product.

Agricultural Transformation in Asia

Agricultural Development in Monsoon Asia
● Monsoon weather cycle in Asia led to reliance on rice production.
● Traditional practice post-war required more intensive manpower specially during planting and
harvesting.
● In between planting and harvesting farmers had to seek employment elsewhere.
● Opportunity cost of labor is high during planting and harvesting, industries cannot hire full-time
employees due to the intermittent demand for labor.
● Traditional farming was adapted after the war which is labor intensive especially during planting and
harvesting seasons. During off season farmers look for other jobs to earn.

Shift from Agriculture to Industry

● Irrigation and high yielding varieties increased agricultural productivity.
● Farmers earned higher income
● Farmers are capable of buying consumer goods.
● Some farmers can afford to migrate to cities to work In industries without diminishing agricultural output.
● Added income is used to adopt more labor-saving harvesting and cultivation techniques.

Traditional Agriculture
● Traditional agriculture could be traced dates back hundred years or more ago
● It is characterized by antiquated methods of cultivation
● Because it is not backed up by scientific method, it is done by Trial and error

Efficiency of Traditional Agriculture (Indian Experience)

● Refined methods of cultivation
● Crop rotation
● Water use
● Farm animals in soil fertility
● Varieties in weather factor
● Availability and quality of traditional seeds and other varieties.
● Keep in mind that agriculture has to be productive and efficient all year round to supply the need of both
traditional and modern sector for food

Efficiency of Traditional Agriculture (Studies in determining if traditional Agriculture was efficient, an

Indian Experience)
● Techniques used
➢ Cobb-Douglas Production Function
- Variable factors of production are efficiently allocated but the fixed factors particularly the
biological assets or the animals used in village were not efficiently allocated due to lack
of economies of scale
- The use of animals in farmings, just like us humans, animals can also get exhausted
which can slow down the process of production, however, according to the study
something could be improved the efficiency of animals.
- Represents two or more relationship of input typically physical, capital and labor and the
number of outputs that can be produced
- It is a commonly used function in macroeconomics and production forecasting
 ➢ Linear Programing
- Also known as linear optimization
- The potential output of agriculture was higher than the actual output.
- There are inefficiencies but these could be removed by improving copping patterns.
- Tentative conclusion: Traditional Agriculture- Efficient but minor improvements could be
made (Mellor and Mudahar, 1992).
- It is a technique to achieve the best output such as a maximum profit at a minimum or
lowest cost in a mathematical model whose requirements are represented by linear
relationships
- Linear programming is special case of mathematical programing which is also known as
mathematical optimization
- The study uncovers the disparity between the projected and the actual output and the
projected or potential output was higher than the actual output which indicates
inefficiencies but improving coping patterns could remove those inefficiencies
➢ Econometric Model
- All resources were allocated efficiently.
- Specifies the statistical relationship between various economic quantities pertaining to a
particular economic phenomenon
- Using this model in determining the efficiency of the traditional agriculture in india the
result of the study indicated that all resources were efficiently allocated.

Efficiency of Traditional Agriculture (Thrust in Agriculture after WW II)

● Modern Farming
● The focus of agriculture after WWII was to install an engine into the system of carabaos to modernize
agriculture which we call modern agriculture or modern farming

Why Do Farmers Resist Innovation and Modernization?

● Leaving our comfort zone is never easy because of Possible uncertainties we may Encounter as we
move to our zone!
● Objective is to Maximize family’s Chances of survival, Not to maximize profit. This is called Subsistence
farming.
● Cultural value of the traditional farming system.
● Uncertainties of change 2 square meals instead of 3 Children might stop schooling. Serve the landlords
as servants.
● Inadequate insurance and credit to serve as fall back mechanism in the event of crop failure.

Micro and Macro Economics of Agriculture (Policy Issues in Agriculture)

Disincentives to Increasing Agricultural Productivity
● Landlords secured all the gains - the landlord would take a bigger share of the gain and the farmer
takes small gain from their harvest
● Gov’t. guaranteed price was not paid
● Lenders captured all the profits
● Complementary inputs were not made available - no fertilizer, pesticides and adequate supply of water

Microeconomics of Agriculture
● Input
➢ Land
➢ Labor
➢ Fertilizer
➢ irrigation
● Output
➢ Harvest
● Input and Harvest depends on
➢ Land size
➢ Soil Fertility
➢ Weather
➢ Flooding
➢ Drought
➢ Disasters
➢ Land Tenure
➢ Technology
➢ Storage & Marketing

What Really Worked or increased the productivity of agriculture?

 ● Green Revolution
➢ Phenomenon created by the Development of higher-yielding Variety of rice at the Int’l Research
Institute in Los Banos.
➢ the development of high-yielding plant varieties – especially of wheat and rice, that increased
food supplies in the 1940s–60s and staved off widespread starvation in developing countries.

➢ The table shows the result of the study conducted by mellor and mudahar (1992), assessing the
success story behind the green revolution. In the third column, showing the annual growth in
rice production in the specific countries. The results shows the key source of increase in rice
production was attributable to the yield per acre with the use of fertilizer and technology. The
expansion of land area with controlled irrigation was also a factor which had a pronounced
positive effect but the effect was not as significant as the contribution attributable to yield the
increase in rice production. Note that the contribution of the yield was substantial at 75%
decrease of the phil and india. As regards Thailand, the contribution of indicated land area was
substantially higher than the yield and this is the result of the country's clearing of rainforest.
● Fertilizer
● Irrigation

➢ Mellor and mudahar (1992) study further shows the significant contribution of irrigation to the
overall increase in rice productivity to be between 30% - 47% across the subject countries and
the study except for thailand and india

What factors did not help much in agriculture in WW II?

● Farm Size
➢ There is an inverse relationship between farm size and overall farm productivity in traditional
agriculture.
➢ Inverse relationship disappears with the use of farming intensity, land quality, use of irrigation
and technology.
➢ Bigger farm size is more labor intensive, more workers have to be fielded which pushes up the
cost and since they are working manually, the production would be slower
➢ With the use of modern farming land size does not matter that much a small farm could be as
efficient as larger farms provided that modern technology or equipment are applied
● Changes in Land Tenure
➢ Owner-operated farms
- owner’s hard labor and the land was used
➢ Tenancy arrangement- operated farms
- Farmers give the landlord a share of their harvests.
- Landlord rents out his land to farmer at a fixed rate.
➢ In countries where land distribution is an issue programs on land redistribution is advocated on
equity grounds.

Macroeconomic Aspects of Agriculture

● Agriculture in Asia is an intensive sector
 ➢ Adopt a labor and capital-intensive technology.
➢ Keep undervalued exchange to maintain appropriate trading terms and promote appropriate
labor-intensive production technology.

Modernizing Agriculture
● Mechanization and demand for labor.
● Technological transfer, growth, and equity.
● Genetic Engineering.
● Zero tillage.
● Research and development.
● Food prices and linkages to energy.
● Shifts out of primary grain production.